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Economics 330 Money and Banking Lecture 8 and 9 - page 8 / 23

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Adverse Selection: The Lemons Problem

If quality cannot be assessed, the buyer is willing to pay at most a price that reflects the average quality

Sellers of good quality items will not want to sell at the price for average quality

The buyer will decide not to buy at all because all that is left in the market is poor quality items

This problem explains fact 2 and partially explains fact 1

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